Catalyst Business Energy Market Brief September 2014

Escalating Russia tensions and unexpected nuclear outages

Escalating Russia/ Ukraine tensions and unexpected nuclear outages supported rises in power and gas prices in August, as contracts saw their first monthly increases this year.

Following on from the crash of flight MH17 over Eastern Ukraine in July, geo-political tensions have dominated market focus. Sanction announcements by Europe, Ukraine and Russia have heightened gas security of supply fears for the winter-ahead.

Crude oil and annual wholesale gas and power prices

Combined with unexpected cuts to winter capacity following nuclear outages, annual prices spiked higher in August, with annual October 14 power climbing 4.2% over the month to average £49.8/MWh, its highest monthly average since May.

Coal and carbon support gains in power while Brent crude slumps to new low

Coal prices rebounded in August and supported increases in long-term power contracts. API 2 coal prices rose as sanctions started to impact Russian exports, with reports emerging that cargoes had been turned away in Europe. Prices averaged $79.5/t for the month. Carbon prices continued recent rises, climbing 5% in August to average €6.3/t following supply cuts at recent auctions. Continued bullish sentiment in the market over supply reforms pushed prices to a five-month high of €6.4/t on 21 August. In contrast, long-term price rises were dampened slightly by a bearish Brent crude oil market. Oil prices hit a 14-month low of $101.8/bl in August as a supply glut in the US combined with downgrades in global demand forecasts.

The month ahead: Nuclear capacity timescales and further security of supply risks

The shutdown of 3GW of capacity at Heysham and Hartlepool nuclear plants could continue to influence power and gas over the coming weeks. Any delay in the eight-week maintenance schedule, which has been predicted by some analysts, could spark further rises in gas for power demand.

Recent news suggesting Russian military personnel had entered Ukraine has only added to geo-political concerns in the region. Any further deterioration in Russia/ Ukraine or Russia/ West relations would increase the risk premium priced into long-term power and gas contracts.

Catalyst Commercial Services’ independent approach enables clients to manage their exposure to energy price risk, while at the same time benefiting from a first class service from a range of major and independent suppliers. Catalyst Commercial Services’ procurement solutions make it simple, so contact a member of the team to discuss requirements.

Annual gas prices

Escalating geopolitical concerns, following the crash of flight MH17 over Eastern Ukraine in July, and subsequent sanctions on the Russian economy sparked fears for security of gas supplies in August.

The annual October 14 gas contract rose 4.6% to average 57.7p/th, its highest monthly average since May. Rises came despite record high storage levels, which reached 96% full.

Spot gas prices

Spot gas prices also rose, influenced in part by increasing geo-political risk. However, the main driver of higher prices was increasing gas demand, which spiked in August as temperatures fell below average levels and nuclear outages created greater CCGT demand.

Day-ahead gas gained 8.7% in August to average 40.3p/th and prices rose to a three-month high of 43.5p/th on 26 August.

Annual power prices

Annual electricity prices followed the rises in gas, and were also influenced by the nuclear outages, a fire at Ferrybridge power station and an uptick in coal prices.

The winter 2014 contract climbed 5.7% month-on-month to £50.1/MWh and hit a three-month high of £51.5/MWh on 18 August. As a result annual October 2014 power gained 4.2% to average £49.8/MWh, down 8% on last year.

Spot power prices

The immediate closure of 3GW of nuclear capacity caused a 6% surge in day-ahead power prices in mid-August, reaching a three-month high of £40.3/MWh on 14 August. The contract averaged £37.6/MWh for the month, 6.4% above the July average.

Rises in day-ahead power came despite higher winder output over the month. Wind generation hit a record 22% of the generation mix on 17 August.

Key market indicators

Ofgem plans supplier-linked Code of Practice for TPIs

Suppliers will only be able to work with third party intermediaries (TPIs) and energy brokers if they are signed up to a new Code of Practice, under plans unveiled by the energy regulator Ofgem.

Concerning trends

TPIs and brokers are an important route to market for non-domestic consumers as the majority of energy contracts are negotiated through them. These organisations help businesses by facilitating energy purchasing contracts between supplier and consumer; many independent or new entrant suppliers use them almost exclusively to reach new customers. But concerns have been raised that some of these TPIs use high-pressure sales tactics or give misleading information.

The regulator does not currently license TPIs. While TPIs are subject to general consumer protection regulations, these mainly seek to protect domestic consumers. However, Ofgem gained specific powers to enforce the Business Protection from Misleading Marketing Regulations 2008 late last year. These powers are an effective tool in addressing misleading marketing activities, but Ofgem considers that additional regulation is necessary to protect businesses. Over the last year, Ofgem has been developing its proposals, which form part of its wider Retail Market Review.

New rules

The TPI Code of Practice, a draft of which was unveiled in 2013, is designed to protect non-domestic consumers when dealing with TPIs and covers issues such as: commission and fees; dispute resolution; clear selling and advertising; and contract terms. In essence the code will ensure brokers are treating their customers in a fair, responsible and trustworthy manner.

While many TPIs and energy brokers have already signed up to voluntary codes of practice (run by suppliers or industry groups), Ofgem’s view is that it should be mandatory for such businesses to do so. In a letter, published on 7 August, Ofgem confirmed its intention to put in place a licence condition on energy suppliers, obligating them to only work with TPIs that have, once it has been launched, signed up to the industry-wide code of practice.

The regulator’s view is that this approach will ensure the right balance between protecting the consumer, enabling innovation and supporting the development of an effective TPI market.

Next stages

Ofgem’s objective is for the code of practice to apply to any organisation that non-domestic consumers rely on for information and advice for meeting their energy needs. The intention is for the code to be overseen by an independent board; however, Ofgem will manage certain aspects of the code.

For the next stage of the project, Ofgem is to develop the details of the arrangements for the code. It plans to hold a series of discussions with industry stakeholders in the autumn and to publish the detailed arrangements for consultation towards the end of the year.

A licence condition for suppliers to only work with code-registered TPIs could be in place by the end of 2015.

Ofgem needs to press on as the changing rules relating to supply contract roll-overs could tilt the SME market in favour of TPIs.

Automatic roll-overs occur when a business customer is migrated to a new contract in the event that they do not take action to negotiate a new deal or switch. Currently suppliers are permitted to automatically place existing fixed-term business customers onto a further fixed 12-month period if the customer does not contact the supplier to terminate their contract.

Last summer the Big Six agreed that by the end of 2014 they would either end the sale of roll-over contracts or would change their terms to enable customers to exit such contracts at will. But concerns have been raised that independent suppliers have not made such commitments. Ofgem is now seeking evidence to understand if the current arrangements provide appropriate protection to micro-businesses – defined as a business with an annual consumption of 100,000kWh for electricity and 293,000kWh for gas.

In a consultation, published on 30 July, Ofgem confirmed it is not looking to ban automatic roll-overs. But the regulator is proposing a number of changes to improve the information that suppliers give to micro-businesses when an energy contract ends, and will seek to standardise the timeframe for contract renewals.

Better information

Under Ofgem’s plans, all micro-business consumers would receive a renewal letter from their supplier around 60 days before a fixed-term contract ends. This letter would include their annual consumption details, and a comparison between prices under the current fixed term and those that would apply if the business did not respond to the letter or terminate the contract before a specified date. Consumers would have the right to provide notice to terminate their contract at the end of the fixed-term, any time up to 30 days before the contract expired. If the customer does decide to end their contract, suppliers are required to acknowledge receipt of termination notice promptly. The regulator is expected to make its decision on the proposals in the autumn.

Despite this announcement receiving little fanfare, changes made as a result of this workstream will have a significant impact on the market.

Efficiency standard mooted for business lets

The government has confirmed its intention to obligate landlords to increase the energy efficiency of their non-domestic buildings.

In a consultation, launched on 22 July, the government described plans to set the minimum energy efficiency standard for non-domestic private rented properties at an Energy Performance Certificate (EPC) “E” rating. Where properties have an EPC rating lower than “E”, landlords will be required to make improvements where there is no up-front cost involved.

Properties newly let from 1 April 2018 will need to meet the minimum energy standard. By 2023 the government wants all let properties, whether under new leases or not, to comply or be able to prove an exemption.

National Grid consults on winter outlook report

The company has issued its winter outlook consultation, with this year’s draft forecast exhibiting a wider range of scenarios as a result of tensions between Russia and Ukraine.

Assessing events

In assessing the winter of 2013-14, the report, published on 31 July, stated that the six-month period from October to March was the fifth warmest on record and had the warmest “cold day” in 86 years. Higher than average temperatures helped lower power and gas demand across the winter months – gas demand fell to its lowest level in seven years. This low demand picture impacted supplies, with gas storage remaining high throughout the winter.

Inputs to the gas system remained consistent with the year before. But the proportion of continental shelf and Norwegian supplies rose. These drivers lowered gas prices. Gas contracts were down from 65p/th-75p/th in 2012-13 to 39p/th-59p/th by 2013-14. This drop fed into power prices, which fell by around 30% over the winter period.

Forward planning

Looking ahead, National Grid said it expects gas supplies for the winter ahead to be affected by last year’s trends. The report showed an increased range for gas storage injections from the 123-435mcm/day last winter to 154-594mcm/day this winter. But the non-storage supply mix for next winter is uncertain given the potential of supply disruptions arising from geopolitical tensions.

The report suggested the UK gas market would “certainly alter” in price and supply if disruption occurred.

The system operator expects flows of Russian gas to be lower this winter, with pipeline imports falling beneath the already low levels seen last year. The system operator suggested that, if the transit of Russian gas through Ukraine were interrupted, the potential reduction to EU gas supplies would be 207mcm/d. LNG supplies and Norwegian exports would be the likely replacement providers. National Grid’s broad range of gas supply scenarios reflected this “continued uncertainty”.

This report is essential reading for those needing to get a handle on the upcoming season in both electricity and gas markets.

Government mulls permitted development for non-domestic rooftop solar

The government has launched a consultation seeking views on a range of options to improve the planning system.

Among other measures, the consultation, launched on 31 July, proposes to introduce permitted development rights to support installation of solar photovoltaic (PV) panels with a capacity of up to 1MW on commercial buildings.

Permitted development rights are a national grant of planning permission that allow certain building works and changes of use to be carried out without a planning application. The new permitted development right would apply to all non-domestic buildings, but there will be restrictions on land within a National Park, the Broads, an Area of Outstanding Natural Beauty, designated conservation areas or those in World Heritage sites. Listed buildings, those within the curtilage, and scheduled monuments are all excluded from the rights.

Responses are invited by 26 September.

Government seeks views on renewables cost relief

The government is seeking views on eligibility for schemes designed to provide relief to electricity-intensive industries to help them cope with rising electricity bills.

Electricity bills are made up of a number of components, including taxes and levies to incentivise investment in energy infrastructure and, in particular, renewables. Following concerns that these add-ons are affecting the competitiveness of the UK’s most energy-intensive businesses, the government pledged to introduce a relief scheme to compensate selected businesses from the cost of the Renewables Obligation, feed-in tariff and contract for difference schemes. In a consultation, launched on 31 July, the government began seeking views on how best to determine which businesses would be eligible for the scheme.

The government’s preferred option is to use a two-tier test. The first test will be at a sector level and will be based on a combination of trade intensity and electricity intensity. The second tier will assess the same data, but on a company level. Businesses that pass both tests could receive support of up to 85% of costs. The impact of the relief schemes is estimated to be 20p/MWh on the price of electricity for all non-exempt consumers.

Responses to the consultation are requested by 23 October.

EU needs cost efficient energy policies: Fortum

Energy and climate policies that “minimise the price tag of decarbonisation” are critical to maintaining European competitiveness, a new study has claimed. Published on 18 August, the Fortum Energy Review argued that decisions on the 2030 climate targets and structural reform of the EU Emissions Trading Scheme (EU ETS) were “urgently needed” to boost progress on the low-carbon transition, and that global efforts on carbon pricing needed to be “accelerated”.

Separately the trade association for Britain’s manufacturers warned that if left unchecked the EU ETS could drive investment in energy intensive industries out of Europe. In a statement, published on 21 August, EEF said that while the mechanism would help to promote renewable energy, it would “do little more” than increase emissions elsewhere as heavy industries relocated to countries with less stringent environmental protections. The organisation called on policy-makers to address the “inefficiency” of driving decarbonisation through both a carbon price and consumer subsidies.

Energy prices soaring under coalition, says Labour

The Labour Party has published figures that it says demonstrate the government’s “failure to tackle rip-off energy bills”.

In a briefing paper, published on 21 August, the party said that, since April 2010, the average dual fuel energy bill had risen by £300 while a typical small business has seen its energy bills rise by more than £13,000. This, the paper argued, is a symptom of a poorly functioning energy market.

A Labour government would, according to the document, act to create a fairer energy market that “works in the interests of consumers”. In particular it would break up the Big Six, obligate suppliers to introduce a “simple new tariff structure” and create a “tough” new energy watchdog with powers to “police the market”. The party also reaffirmed its commitment to implement a 20-month energy price freeze if it wins the 2015 general election.

Government must increase support for low-carbon innovation

The government must do more to support green businesses, a committee of MPs has claimed. In a report, published on 4 August, the energy and climate change committee claimed that the government is “punching below its weight” when it comes to supporting UK businesses developing new innovative low-carbon technologies such as smart metering and heat pumps. The committee called on the government to “put more resource” into providing support for businesses in the low-carbon sector or risk the potential for low-carbon innovation not being realised.

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